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Letter from America

A campaign which has 'divided the country', brought out the worst in people and played deeply on ingrained suspicion of Washington, politicians, vested interests and the media is finally at an end.

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A campaign which has ‘divided the country’, brought out the worst in people and played deeply on ingrained suspicion of Washington, politicians, vested interests and the media is finally at an end. Donald Trump becomes the 45th President of the United States. This is a massive anti-establishment vote by the American people and one which, although the US media did not expect, I strongly felt was a distinct possibility.

Trump panic; don’t panic

If Brexit taught us anything, it is don’t trust the stock market’s initial knee-jerk reaction to the news. Markets will react negatively to the Trump victory initially, but let’s not forget a vote for Trump is a big reflation trade. Trump has openly stated he will be ‘fiscal heavy’ in his policies, which are essentially ‘pro-growth’.

US Federal Reserve independence and implications for US interest rates

But first, given the Trump victory, will Janet Yellen feel she has to resign her chairmanship of the US Federal Reserve? So vocal has Trump’s criticism of her been that she may feel she has to go in order to preserve the Fed’s integrity. Presumably vice-chair, Stanley Fischer, could step up to present stability and calm financial markets. The December interest rate hike is likely to be off, pending assessment of the economic impact of the election result, unless a supremely confident Federal Open Market Committee feels that pressing ahead with a rate rise is the best way to show its independence by rising above the cut and thrust of the political noise.

Medium-term outlook

What will the new regime look like under President Trump? As already mentioned, medium term, Trump will be reflationary, with tax reform likely to encourage corporates to repatriate cash held overseas, infrastructure spending and no great concern about higher deficits short term. Against a background of pretty full employment and wage growth of 2.8%, announced last week, this should spell higher interest rates and bond yields over time.

Implications for US dollar

The dollar is likely to continue weak as the market digests Trump’s plans for increased infrastructure spending, with little regard to the effect on the already burgeoning US deficit.

Legislation

Once Trump takes over the reins of the White House in January 2017, it’ll be highly unlikely he can implement even half of the proposals that have characterised his campaign trail. Although now Republicans have retained control of the Senate, or upper house, it may make pushing through Trump legislation somewhat easier.

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14 Nov 2016 | By Richard Buxton

Having so completely misjudged the result of the UK's EU membership referendum, it will no doubt be easy for readers to cavil at what I am about to say.